Visiting Fellow to Northampton Business School
Apologists and beneficiaries of huge executive pay packets talk of the ‘rate for the job’, and the ‘commercial realities’. Opponents and critics talk of greed, unfairness, and the exploitation of the weak by the strong. The former say the latter don’t understand how markets work. The latter say the former refuse even to acknowledge the possibility that their sense of entitlement is exaggerated.
It is a dialogue of the deaf. The protagonists transmit, but don’t receive. There seems to be no common ground on which to debate and thereby reach some kind of resolution to one of the most important socio-economic issues of our age.
Two articles in the Financial Times of June 10, 2013 exemplify the great divide, and inadvertently suggest how it might be bridged.
The first on page three in the main paper reports that ‘The median total remuneration of FTSE 100 chief executives rose 8% [about six times the growth in average earnings in the UK economy as a whole] to £3.7m last year’, as higher share prices ‘drove a windfall from long-term incentive plans.’ The figures, from proxy voting agency, Manifest, and remuneration consultants, MM&K, show that the growth of CEO earnings has continued unabated, throughout the traumas and recessions of recent years that some, myself included, hoped would put a brake on the executive pay explosion. Between 1998 and 2012 the average pay of FTSE 100 bosses grew from 47 times to 133 times their employees’ average earnings.
There is no reference in the page three report to the John Authers column on page 20 in the Companies section of the FT, head-lined: ‘Elitist systems carry seeds of their own destruction’ and Authers makes no reference to the page three piece. Once spotted, however, the connection is obvious. The three books Authers refers to - Why Nations Fail, by Daron Acemoglu and James Robinson, When the Money Runs Out, by Stephen King, Balance – The Economics of Great Powers from Ancient Rome to Modern America, by Glenn Hubbard - all argue, says Authers, that ‘political systems that intensify inequality or that work exclusively for the benefit of particular groups, carry with them the seeds of their own destruction.’ History is littered with examples: the Bourbons, in France; the Romanovs, in Russia; the Stewarts, in Britain; the Pahlavis, in Iran; and more recently dictators in North Africa.
The three recently published books Authers mentions echo a warning in my own book, Business at a Crossroads. The crisis of corporate leadership (Palgrave Macmillan, 2009), in which I argued that very high levels of top executive pay are undermining what I called the ‘liberal-capitalist consensus’.
A shared wish for political stability is the common ground for the apologists for, and critics of, very high levels of executive pay. Both sides in the debate have an interest in ensuring the seeds of self-destruction in the high, still growing levels of inequality generated by the executive pay explosion do not germinate and lead to social instability. Social instability impoverishes people and disrupts the efficient working of the wealth creation process from which senior executives skim such a disproportionate share.
It’s on this common ground, the common desire for stability, where the essential question must be settled.
Is the great wealth of company executives a creature of capitalism itself; or is it rather a creature of inefficiencies in the market for senior executives?
If the indulgence of natural human impulses in a capitalist system leads inevitably to enormous disparities in income and wealth then such disparities, and the sense of unfairness they foster, are the price we have to pay for the superior allocative efficiency of the free market system. Until, that is, the seeds of self-destruction germinate, and ordinary people demand another, less efficient, but more equitable system.
If, as we should all hope and as actually seems more likely, given the adaptability that capitalism has demonstrated in the past, the fault lies not in the system itself, but in market inefficiencies, then the executive pay problem is corrigible and the market for executive talent could, in time, become as efficient as the market for Premiership footballers.
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[The views and opinions expressed in this blogs by guests or members of the CCEG are those of the author, and not of the CCEG or the University of Northampton Business School]
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